Reinsurance Types and Coverage Module 5 Reinsurance Types and Coverage Introduction

There are multiple methods for ceding business to a reinsurer. These include Yearly Renewable Term (YRT), Coinsurance, Modified Coinsurance, Partially Modified Coinsurance, Funds Withheld and Coinsurance Funds Withheld. Reinsurance agreements can provide coverage for new business written, in force policies, or a combination thereof.

Objective
After this training you should be able to understand: Methods of reinsurance New business versus in force coverage

Content
There are multiple methods for ceding business to a reinsurer. Primary methods include Yearly Renewable Term (YRT), Coinsurance, and Modified Co-insurance. Less frequently seen methods which are generally related to financial reinsurance transactions include Partially Modified Coinsurance, Funds Withheld and Coinsurance with Funds Withheld. Primary Methods: Yearly Renewable Term (YRT) Reinsurance A form of life reinsurance usually covering only mortality risk under which the ceding insurer buys coverage for the net amount at risk on the reinsured portion of the policy for a specified premium that may vary each year with the amount at risk, the duration of the policy, and the ages of the insured(s). The ceding insurer retains responsibility for establishing reserves and the payment of all surrenders, dividends, commissions, and expenses. Despite its name, YRT reinsurance contracts typically obligate the reinsurer to continue coverage throughout the life of the policy. YRT Agreements can be based on a quota share of all policies issued up to its maximum limit of retention per life for the insureds issue age and rating or on an excess of retention basis

Treaty provisions will generally indicate the following which is useful for the administration of the business: How the Reinsured Net Amount at Risk will be calculated How changes in cash/account/terminal reserve value will be allocated Coinsurance A method of reinsurance under which the reinsurer receives a proportionate share of the premiums, sets up a proportionate share of the reserves and pays its proportionate share of the benefits of the reinsured policy. The reinsurer pays the ceding commission and expense allowance to the ceding company to represent the reinsurers share of the acquisition and maintenance expenses. Treaty provisions will generally indicate the following which is useful for the administration of the business: How the Reinsured Net Amount at Risk will be calculated The specific manner and timing in which Cash/Account/Terminal Reserve Value will be measured for the Policy Net Amount at Risk particularly for variable plans where such amounts may change more frequently. Modified Coinsurance (Modco) Indemnity life reinsurance that differs from coinsurance only in that the assets supporting the reserves are transferred back to the ceding company while the risk remains with the reinsurer. The ceding company is required to pay interest to replace that which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. Used to retain control of investments or to reduce potential credit risk.

Secondary Methods: Partially Modified Coinsurance (Part-Co) This reinsurance method is a combination of coinsurance and modified coinsurance. In most situations, a portion of the initial reserves equal to the initial allowance are held on a mod-co basis, while remaining reserves are held on a coinsurance basis, eliminating any initial cash transfer. Also known as Co/Mod-Co.

Funds Withheld Assets that would normally be paid over to a reinsurer but are withheld by the ceding company to permit statutory credit for non-admitted reinsurance, to reduce potential credit risk, or to retain control over investments. Coinsurance Funds Withheld A form of modified coinsurance where the initial allowance which is normally paid to the ceding company is withheld by the reinsurer to reduce the reinsurers exposure to the credit risk of the ceding company. Example of Treaty Language for Reinsurance Basis for Canada

BASIS OF REINSURANCE
Reinsurance Basis: < select: > YRT, or Coinsurance, or Other < specify >

Example of Treaty language for Reinsurance Basis for the US

This is a [specify basis of reinsurance (e.g., YRT, coinsurance or modified coinsurance)] agreement for indemnity reinsurance (the Agreement) solely between [insert Ceding Company name] of [insert Ceding Company domicile (e.g., state, province or territory)] (the Ceding Company) and [insert Reinsurer name] of [insert Reinsurer domicile] (the Reinsurer). The Ceding Company and the Reinsurer may be referred to individually as a Party or collectively as the Parties. The performance of the obligations of each Party under this Agreement shall be rendered solely to the other Party. The acceptance of risks under this Agreement shall create no right or legal relationship between the Reinsurer and the insured, owner or beneficiary of any insurance policy or other contract of the Ceding Company.

New Business vs. In force Policy Coverage Reinsurance agreements can provide coverage for new business written or in force policies (or a combination thereof) Example of Treaty language for New Business vs. In Force Policy Coverage in the US Policies and Risks Reinsured for the 19XX underwriting year: 1. In force Policies and Risks Reinsured On the Effective Date of this Agreement, the amount of reinsurance under this Agreement will be 100% of the Ceding Companys net liability on those in force policies assumed and issued by the Ceding Company known as the XYZ POOL. Net liability

shall mean the Ceding Companys liability on policies reinsured hereunder, less amounts recoverable from other reinsurance. 2. New Policies and Risks Reinsured After the Effective Date of this Agreement, the amount of reinsurance under this Agreement will be 100% of the Ceding Companys net liability on policies, assumed and issued by the Ceding Company known as the XYZ POOL under the terms of the agreements between the Ceding Company and the XYZ POOL. Net liability shall mean the Ceding Companys liability on policies reinsured hereunder, less amounts recoverable from other reinsurance.

Discussion:
Below is a summary of the differences between various options for the basis of reinsurance. Basis of Reinsurance Type of Risk Reinsured Definition of Basis of Reinsurance

YRT

Mortality Risk is transferred to the Reinsurer

A form of life reinsurance usually covering only mortality risk under which the ceding insurer buys coverage for the net amount at risk on the reinsured portion of the policy for a specified premium that may vary each year with the amount at risk, the duration of the policy, and the ages of the insured(s). Despite its name, YRT reinsurance contracts typically obligate the reinsurer to continue coverage throughout the life of the policy. A method of reinsurance under which the reinsurer receives a proportionate share of the premiums, sets up a proportionate share of the reserves and pays its proportionate share of the benefits of the reinsured policy. The reinsurer pays the

Coinsurance

Mortality Risk and Reserves are transferred to the Reinsurer

ceding commission and expense allowance to the ceding company to represent the reinsurers share of the acquisition and maintenance expenses. Modified Coinsurance Mortality Risk transferred to the Reinsurer and Reserves are Retained by the Ceding Company Indemnity life reinsurance that differs from coinsurance only in that the assets supporting the reserves are transferred back to the ceding company while the risk remains with the reinsurer. The ceding company is required to pay interest to replace that which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. Used to retain control of investments or to reduce potential credit risk. This reinsurance method is a combination of coinsurance and modified coinsurance. In most situations, a portion of the initial reserves equal to the initial allowance are held on a mod-co basis, while remaining reserves are held on a coinsurance basis, eliminating any initial cash transfer. Also known as Co/Mod-Co. Assets that would normally be paid over to a reinsurer but are withheld by the ceding company to permit statutory credit for non-admitted reinsurance, to reduce potential credit risk, or to retain control over investments.

Partially Modified Coinsurance

Initial reserves equal to the Initial Allowance transferred on a modified coinsurance basis; Remaining reserves are held on a coinsurance basis.

Funds Withheld

Ceding company holds assets for investments.

Coinsurance Funds Withheld

Reinsurer holds assets related to the initial allowance

A form of modified coinsurance where the initial allowance which is normally paid to the ceding company is withheld by the reinsurer to reduce the reinsurers exposure to the credit risk of the ceding company.

Questions:
1. Indemnity life reinsurance that differs from coinsurance only in that the assets supporting the reserves are transferred back to the ceding company while the risk remains with the reinsurer. The ceding company is required to pay interest to replace that which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. Used to retain control of investments or to reduce potential credit risk. (1) (2) (3) (4) 2. YRT Coinsurance Modified Coinsurance Funds Withheld

Which of the following is a primary method of ceding reinsurance to a reinsurer? a. Funds Withheld b. Partially Modified Coinsurance c. Coinsurance

3.

A form of life reinsurance usually covering only mortality risk under which the ceding insurer buys coverage for the net amount at risk on the reinsured portion of the policy for a specified premium that may vary each year with the amount at risk, the duration of the policy, and the ages of the insured(s). a. b. c. d. Funds Withheld Partially Modified Coinsurance Coinsurance YRT

NOTES
John E. Tiller, Jr., FSA, MAAA and Denise Fagerberg Tiller, FSA, Life, Health, & Annuity Reinsurance, 3rd ed. (Winsted, CT, ACTEX Publications, Inc., 2005) American Council of Life Insurers, Life Reinsurance Treaty Sourcebook, 2nd Printing, 2008 Canadian Life and Health Insurance Association, Inc., CLHIA Reinsurance Treaty Reference Document, 6th Printing, 2009